Annual Reports

  • 20-F (Apr 2, 2014)
  • 20-F (Apr 1, 2014)
  • 20-F (Mar 21, 2013)
  • 20-F (Mar 14, 2013)
  • 20-F (May 31, 2011)
  • 20-F (Nov 26, 2010)

 
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Empresa Nacional de Electricidad S.A. 20-F 2009

Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                       to                        

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

Commission file number: 1-13240

 

EMPRESA NACIONAL DE ELECTRICIDAD S.A.

(Exact name of Registrant as specified in its charter)

 

EMPRESA NACIONAL DE ELECTRICIDAD S.A.

(Translation of Registrant’s name into English)

 

CHILE

(Jurisdiction of incorporation or organization)

 

Santa Rosa 76, Santiago, Chile

Telephone No. (562) 630-9000

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares

 

New York Stock Exchange

Shares

 

New York Stock Exchange*

 

*Listed, not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 



Table of Contents

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

$ 400,000,000

 

8.500%

 

Notes due 2009

$ 400,000,000

 

8.350%

 

Notes due 2013

$ 200,000,000

 

8.625%

 

Notes due 2015

$ 205,881,000

 

7.875%

 

Notes due 2027

$ 220,000,000

 

7.325%

 

Notes due 2037

$ 40,416,000

 

8.125%

 

Notes due 2097

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Shares of Common Stock:

8,201,754,580

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

x Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
o

 

Other x

 

Indicate by check mark which financial statement item the registrant has elected to follow:

o Item 17   x Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 



Table of Contents

 

TABLE OF CONTENTS

 


 

 

Page

 

 

GLOSSARY

4

INTRODUCTION

8

Financial Information

8

Technical Terms

9

Calculation of Economic Interest

9

Forward-Looking Statements

9

PART I

11

Item 1.

Identity of Directors, Senior Management and Advisors

11

Item 2.

Offer Statistics and Expected Timetable

11

Item 3.

Key Information

11

Item 4.

Information on the Company

22

Item 4A.

Unresolved Staff Comments

71

Item 5.

Operating and Financial Review and Prospects

71

Item 6.

Directors, Senior Management and Employees

96

Item 7.

Major Shareholders and Related Party Transactions

105

Item 8.

Financial Information

106

Item 9.

The Offer and Listing

108

Item 10.

Additional Information

110

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

124

Item 12.

Description of Securities other than Equity Securities

127

PART II

 

128

Item 13.

Defaults, Dividend Arrearages and Delinquencies

128

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

128

Item 15.

Controls and Procedures

128

Item 16.

[Reserved]

129

Item 16A.

Audit Committee Financial Expert

129

Item 16B.

Code of Ethics

129

Item 16C.

Principal Accountant Fees and Services

130

Item 16D.

Exemptions from Listing Requirements for Audit Committees

131

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Persons

131

Item 16F.

Change in Registrant’s Certifying Accountant

131

Item 16G.

Corporate Governance

131

 

 

 

PART III

 

133

Item 17.

Financial Statements

133

Item 18.

Financial Statements

133

Item 19.

Exhibits

133

 

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Endesa Chile’s Simplified Organizational Structure (1)

As of December 31, 2008

 

 


(1):

Only principal operating subsidiaries are presented here. Percentage ownership includes Endesa Chile’s direct and indirect equity interest.

 

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GLOSSARY

 

Acciona, S.A.

 

Acciona, S.A.

 

Spanish construction holding company. Together with Enel, Acciona held a controlling interest in Endesa Spain as of December 31, 2008.

 

 

 

 

 

ADR

 

American Depositary Receipt

 

Receipt evidencing a variable number of ADSs.

 

 

 

 

 

ADS

 

American Depositary Share

 

One ADS represents 30 common shares of the Company.

 

 

 

 

 

AESGener or Gener

 

AES Gener S.A.

 

Chilean generation company that competes with us in Chile, Argentina, Brazil and Colombia.

 

 

 

 

 

AFP

 

Administradora de Fondos de Pensiones

 

Chilean pension fund.

 

 

 

 

 

Ampla

 

Ampla Energía e Servicos S.A.

 

Brazilian distribution company operating in Rio de Janeiro, owned by Endesa Brasil, a subsidiary of our parent company, Enersis.

 

 

 

 

 

ANEEL

 

Agéncia Nacional de Energia Elétrica

 

Brazilian governmental agency for electric energy.

 

 

 

 

 

Betania

 

Central Hidroeléctrica de Betania S.A. E.S.P.

 

Colombian subsidiary which merged with Emgesa, another Endesa Chile subsidiary, in 2007.

 

 

 

 

 

Bureau Veritas

 

Bureau Veritas

 

International independent certification company.

 

 

 

 

 

Cachoeira Dourada

 

Centrais Eléctricas Cachoeira Dourada S.A.

 

Brazilian generation company owned by Endesa Brasil, a subsidiary of our parent company, Enersis.

 

 

 

 

 

Cammesa

 

Compañía Administradora del Mercado Mayorista Eléctrico S.A.

 

Argentine autonomous entity in charge of the operation of the Mercado Eléctrico Mayorista (Wholesale Electricity Market), or MEM. Cammesa’s stockholders are generation, transmission and distribution companies, large users and the Secretariat of Energy.

 

 

 

 

 

CDEC

 

Centro de Despacho Económico de Carga

 

Autonomous entity in two Chilean electric systems in charge of coordinating the efficient operation and dispatch of generation units to satisfy demand.

 

 

 

 

 

CELTA

 

Compañía Eléctrica Tarapacá S.A.

 

Chilean generation subsidiary of Endesa Chile that operates in the SING with thermal plants.

 

 

 

 

 

CEMSA

 

Compañía de Energía del Mercosur S.A.

 

Argentine energy trading company, a subsidiary of Endesa Chile.

 

 

 

 

 

Chilectra

 

Chilectra S.A.

 

Chilean electricity distribution company operating in the Santiago metropolitan area and owned by our parent company, Enersis.

 

 

 

 

 

CIEN

 

Companhia de Interconexão Energética S.A.

 

Brazilian transmission company, wholly-owned by Endesa Brasil, a subsidiary of our parent company, Enersis.

 

 

 

 

 

CNE

 

Comisión Nacional de Energía

 

Chilean National Energy Commission, governmental entity with responsibilities under the Chilean regulatory framework.

 

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Codensa

 

Codensa S.A. E.S.P.

 

Colombian distribution company controlled by our parent company, Enersis, that operates mainly in Bogotá.

 

 

 

 

 

Coelce

 

Companhia Energética do Ceará S.A.

 

Brazilian distribution company operating in the state of Ceará. Coelce is controlled by Endesa Brasil, a subsidiary of our parent company, Enersis.

 

 

 

 

 

CREG

 

Comisión de Regulación de Energía y Gas

 

Colombian Commission for the Regulation of Energy and Gas.

 

 

 

 

 

CTM

 

Compañía de Transmisión del Mercosur

 

Endesa Brasil’s transmission subsidiary with operations in Argentina.

 

 

 

 

 

Edegel

 

Edegel S.A.A.

 

Peruvian generation company, a subsidiary of Endesa Chile.

 

 

 

 

 

Edelnor

 

Empresa de Distribución Eléctrica de Lima Norte S.A.A.

 

Peruvian distribution company with a concession area in the northern part of Lima, a subsidiary of our parent company, Enersis.

 

 

 

 

 

Edesur

 

Empresa Distribuidora Sur S.A.

 

Argentine distribution company with a concession area in the south of the Buenos Aires larger metropolitan area, a subsidiary of our parent company, Enersis.

 

 

 

 

 

El Chocón

 

Hidroeléctrica El Chocón S.A.

 

Argentine generation company, a subsidiary of Endesa Chile, with two hydroelectric plants, El Chocón and Arroyito, in the Limay River.

 

 

 

 

 

Emgesa

 

Emgesa S.A. E.S.P.

 

Colombian generation company controlled by Endesa Chile.

 

 

 

 

 

Endesa Brasil

 

Endesa Brasil, S.A.

 

Brazilian holding company, subsidiary of our parent company, Enersis, created in 2005.

 

 

 

 

 

Endesa Chile

 

Empresa Nacional de Electricidad S.A.

 

Our company, a publicly held limited liability stock company incorporated under the laws of the Republic of Chile, with operations in Chile, Argentina, Colombia and Peru and an equity interest in Brazil, and 12,906 MW of consolidated installed capacity. Registrant of this Report.

 

 

 

 

 

Endesa Costanera

 

Endesa Costanera S.A.

 

Argentine generation company controlled by Endesa Chile.

 

 

 

 

 

Endesa Fortaleza

 

Central Geradora Termelétrica Endesa Fortaleza S.A.

 

Operates a combined cycle generating plant, located in the state of Ceará. Endesa Fortaleza is wholly owned by Endesa Brasil, a subsidiary of our parent company, Enersis.

 

 

 

 

 

Endesa Latinoamérica

 

Endesa Latinoamérica S.A.

 

Formerly Endesa Internacional, a subsidiary of Endesa Spain and the direct controller of our parent company, Enersis.

 

 

 

 

 

Endesa Spain

 

Endesa, S.A.

 

A Spanish electricity generation and distribution company with a 60.6% equity interest in Enersis.

 

 

 

 

 

Enel

 

Enel S.p.A

 

Italian power company, with a controlling-ownership of Endesa Spain.

 

 

 

 

 

Enersis

 

Enersis S.A.

 

Chilean company with a 60.0% controlling stake in Endesa Chile.

 

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ENRE

 

Ente Nacional Regulatorio de la Energía

 

Argentine national regulatory authority of the energy sector.

 

 

 

 

 

Foninvemem

 

Fondo Para Inversiones Necesarias Que Permitan Incrementar La Oferta De Energía Eléctrica En El Mercado Eléctrico Mayorista

 

Argentine fund created to increase electricity supply in the MEM.

 

 

 

 

 

GasAtacama

 

GasAtacama S.A.

 

Company involved in the gas transportation and electricity generation in the north of Chile, an affiliate of Endesa Chile.

 

 

 

 

 

GNLQ

 

Gas Natural Quintero S.A.

 

Company created to develop, build, finance, own and operate a LNG regasification facility at Quintero Bay (Chile), in which LNG will be unloaded, stored and regasified.

 

 

 

 

 

IFRS

 

International Financial Reporting Standards

 

Accounting standards that the company adopted on January 1, 2009.

 

 

 

 

 

LNG

 

Liquefied Natural Gas.

 

Liquefied natural gas.

 

 

 

 

 

MEM

 

Mercado Eléctrico Mayorista

 

Wholesale Electricity Market in Argentina.

 

 

 

 

 

MME

 

Ministério de Minas e Energia

 

Ministry of Mines and Energy of Brazil.

 

 

 

 

 

NIS

 

Sistema Interconectado Nacional

 

National interconnected electric system. There are such systems in Argentina, Brazil and Colombia.

 

 

 

 

 

ONS

 

Operador Nacional do Sistema Elétricos

 

Electric System National Operator. Brazilian non-profit private entity responsible for the planning and coordination of operations in interconnected systems.

 

 

 

 

 

Osinergmin

 

Organismo Supervisor de la Inversión en Energía y Minería

 

Energy and Mining Investment Supervisor Authority, the Peruvian regulatory electricity authority.

 

 

 

 

 

Pangue

 

Empresa Eléctrica Pangue S.A.

 

Chilean electricity company, owner of the Pangue power station. Pangue is an Endesa Chile subsidiary.

 

 

 

 

 

Pehuenche

 

Empresa Eléctrica Pehuenche S.A.

 

Chilean electricity company, owner of three power stations in the Maule basin. Pehuenche is an Endesa Chile subsidiary.

 

 

 

 

 

San Isidro

 

Compañía Eléctrica San Isidro S.A.

 

Chilean electricity company, owner of a thermal power station. San Isidro is wholly-owned by Endesa Chile.

 

 

 

 

 

SEF

 

Superintendencia de Electricidad y Combustible

 

Governmental entity in charge of supervising the Chilean electricity industry.

 

 

 

 

 

SEIN

 

Sistema Eléctrico Interconectado Nacional

 

Peruvian interconnected electric system.

 

 

 

 

 

SIC

 

Sistema Interconectado Central

 

Chilean central interconnected electric system covering all of Chile except the north and the extreme south.

 

 

 

 

 

SING

 

Sistema Interconectado del Norte Grande

 

Electric interconnected system operating in northern Chile.

 

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SVS

 

Superintendencia de Valores y Seguros

 

Chilean authority in charge of supervising public companies, securities and the insurance business.

 

 

 

 

 

UF

 

Unidad de Fomento

 

Chilean inflation-indexed peso denominated monetary unit.

 

 

 

 

 

UTA

 

Unidad Tributaria Anual

 

Chilean annual tax unit. One UTA equals 12 UTM.

 

 

 

 

 

UTM

 

Unidad Tributaria Mensual

 

Chilean monthly tax unit used to define fines, among other purposes.

 

 

 

 

 

VAD

 

Valor Agregado de Distribución

 

Valued added from distribution of electricity.

 

 

 

 

 

VNR

 

Valor Nuevo de Reemplazo

 

The net replacement value of electricity assets.

 

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INTRODUCTION

 

As used in this Report on Form 20-F, first person personal pronouns such as “we,” “us” or “our” refer to Empresa Nacional de Electricidad S.A. (“Endesa Chile” or “the Company”) and our consolidated subsidiaries unless the context indicates otherwise.  Unless otherwise noted, our interest in our principal subsidiaries and related companies is expressed in terms of our economic interest as of December 31, 2008.

 

We are a Chilean company with electricity generation assets, and with subsidiaries and unconsolidated equity investments engaged primarily in the generation, transmission and distribution of electricity in Chile, Argentina, Brazil, Colombia and Peru.  As of the date of this Report, our direct controlling entity, ENERSIS S.A. (“Enersis”), owns a 60.0% stake in our company.  ENDESA, S.A. (“Endesa Spain”), in turn, holds a 60.6% beneficial interest in Enersis.

 

Financial Information

 

In this Report on Form 20-F, unless otherwise specified, references to “dollars,” “$,” are to United States dollars; references to “pesos” or “Ch$” are to Chilean pesos; the legal currency of Chile; references to “Ar$” or “Argentine pesos” are to the legal currency of Argentina; references to “R$,”  or “reais” are to Brazilian reals, the legal currency of Brazil; references to “soles” are to Peruvian soles, the legal currency of Peru; references to “CPs” or “Colombian pesos” are to the legal currency of Colombia; references to “€” or “Euros” are to the legal currency of the European Union; and references to “UF” are to Unidades de Fomento.

 

The Unidad de Fomento is a Chilean inflation-indexed, peso-denominated monetary unit.  The UF rate is set daily in advance based on changes in the previous month’s inflation rate.  As of December 31, 2008, UF 1 was equivalent to Ch$ 21,452.57.  The dollar equivalent of UF 1 was $ 33.71 at December 31, 2008, using the Observed Exchange Rate reported by the Banco Central de Chile (the “Chilean Central Bank,” or the “Central Bank”) as of December 31, 2008 of Ch$ 636.45 per $ 1.00.  As of May 29, 2009, UF 1 was equivalent to Ch$ 20,992.00.  The dollar equivalent of UF 1 was $ 37.45 for May 29, 2009, using the Observed Exchange Rate reported by the Central Bank of Ch$ 560.58 per $ 1.00.

 

Our audited consolidated financial statements and, unless otherwise indicated, other financial information concerning us and our subsidiaries included in this Report are presented in constant pesos in conformity with Chilean generally accepted accounting principles (“Chilean GAAP”) and the rules of the Superintendencia de Valores y Seguros, or SVS.  Data expressed in pesos for all periods in the Company’s audited consolidated financial statements for the three fiscal years ended December 31, 2008 are expressed in constant pesos as of December 31, 2008.  See Note 2 to our audited consolidated financial statements included herein.  For Chilean accounting purposes, inflation adjustments are calculated based on a “one-month lag” convention using an inflation adjustment factor based on the Indice de Precios al Consumidor (Chilean consumer price index, or “Chilean CPI”).  The Chilean CPI is published by Chile’s Instituto Nacional de Estadísticas (the “National Bureau of Statistics”).  For example, the inflation adjustment applicable for the 2008 calendar year is the percentage change between the November 2007 Chilean CPI and the November 2008 Chilean CPI, which was 8.9%.  On the other hand, economic inflation for 2008 is based on the CPI change between December 31, 2007 and 2008, which amounted to 7.1% and was lower than the figure used in accordance with accounting norms.  Chilean GAAP differs in certain important respects from accounting principles generally accepted in the United States (“U.S. GAAP”).  See Note 36 to our audited consolidated financial statements contained elsewhere in this Report for a description of the principal differences between Chilean GAAP and U.S. GAAP, as they relate to us, and for a reconciliation to U.S. GAAP stockholders’ equity and net income as of and for each of the three years in the three-year period ended December 31, 2008.

 

Under Chilean GAAP, we consolidate the results from operations of a company defined as a “subsidiary” under Law No. 18,046 (the “Chilean Companies Act”).  In order to consolidate a company, we must generally satisfy one of two criteria:

 

·                  control, directly or indirectly, more than a 50% voting interest in such company; or

 

·                  nominate or have the power to nominate a majority of the Board of Directors of such company if we control 50% or less of the voting interest of that company.

 

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As of December 31, 2008, we consolidated all our Chilean subsidiaries, primarily, Compañía Eléctrica Tarapacá S.A. (“Celta”), Empresa Eléctrica Pangue S.A. (“Pangue”), Empresa Eléctrica Pehuenche S.A. (“Pehuenche”), Compañía Eléctrica San Isidro S.A. (“San Isidro”).  In Argentina, we consolidated Central Hidroeléctrica El Chocón S.A. (“El Chocón”), and Endesa Costanera S.A. (“Endesa Costanera”).  In Colombia, we consolidated the generation company Emgesa S.A. E.S.P., (“Emgesa”) which is controlled pursuant to a shareholders’ agreement.  We also consolidated the generation company Edegel S.A.A. (“Edegel”), in Peru.

 

For the convenience of the reader, this Report contains translations of certain peso amounts into dollars at specified rates.  Unless otherwise indicated, the dollar equivalent for information in pesos is based on the Observed Exchange Rate, as defined in “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” at December 31, 2008.  The Federal Reserve Bank of New York does not report a noon buying rate for pesos.  No representation is made that the peso or dollar amounts shown in this Report could have been or could be converted into dollars or pesos, as the case may be, at such rate or at any other rate.  See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates.”

 

Technical Terms

 

References to “GW” and “GWh” are to gigawatts and gigawatt hours, respectively; references to “MW” and “MWh” are to megawatts and megawatt hours, respectively; references to “kW” and “kWh” are to kilowatts and kilowatt hours, respectively; and references to “kV” are to kilovolts.  Unless otherwise indicated, statistics provided in this Report with respect to electricity generation facilities are expressed in MW, in the case of the installed capacity of such facilities.  One GW = 1,000 MW, and one MW = 1,000 kW.  Statistics relating to aggregate annual electricity production are expressed in GWh and are based on a year of 8,760 hours, except for 2008, a leap year, based on 8,784 hours.  Statistics relating to installed capacity and production of the electricity industry do not include electricity of self-generators.  Statistics relating to our production do not include electricity consumed by us from our generators.

 

Energy losses in transmission are calculated by subtracting the number of GWh of energy sold from the number of GWh of energy purchased and generated (that excludes own energy consumption and losses of the power plant), within a given period.

 

Calculation of Economic Interest

 

References are made in this Report to the “economic interest” of Endesa Chile and its subsidiaries or affiliates.  In circumstances where we do not directly own an interest in a subsidiary or affiliate, our economic interest in such subsidiary or affiliate is calculated by multiplying the percentage beneficial interest in a directly held subsidiary or affiliate by the percentage beneficial interest of any entity in the chain of ownership of such subsidiary or affiliate.  For example, if we own 60% of a directly held subsidiary and that subsidiary owns 40% of an affiliate, our economic beneficial interest in such related company would be 24%.

 

Forward-Looking Statements

 

This Report contains statements that are or may constitute forward-looking statements.  These statements appear throughout this Report and include statements regarding our intent, belief or current expectations, including, but not limited to, any statements concerning:

 

·                  our capital investment program;

 

·                  trends affecting our financial condition or results from operations;

 

·                  our dividend policy;

 

·                  the future impact of competition and regulation;

 

·                  political and economic conditions in the countries in which we or our related companies operate or may operate in the future;

 

·                  any statements preceded by, followed by or that include the words “believes,” “expects,” “predicts,” “anticipates,” “intends,” “estimates,” “should,” “may” or similar expressions; and

 

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·                  other statements contained or incorporated by reference in this Report regarding matters that are not historical facts.

 

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.  Factors that could cause actual results to differ materially include, but are not limited to:

 

·                  changes in the regulatory framework for the electric industry in one or more of the countries in which we operate;

 

·                  changes in the environmental regulatory framework in one or more of the countries in which we operate;

 

·                  our ability to implement proposed capital expenditures, including our ability to arrange financing where required;

 

·                  the nature and extent of future competition in our principal markets;

 

·                  political, economic and demographic developments in the emerging market countries of South America where we conduct our business; and

 

·                  the factors discussed below under “Risk Factors.”

 

You should not place undue reliance on such statements, which speak only as of the date that they were made.  Our independent public accountants have not examined or compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements.  You should consider these cautionary statements together with any written or oral forward-looking statements that we may issue in the future.  We do not undertake any obligation to release publicly any revisions to forward-looking statements contained in this Report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

For all these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I

 

Item 1.   Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2.   Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.   Key Information

 

A.            Selected financial data.

 

The following summary of consolidated selected financial and operating data should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, included in this Report.  Our audited consolidated financial statements are prepared in accordance with Chilean GAAP and the rules of the SVS, which differ in certain important respects from U.S. GAAP.  Note 36 to our audited consolidated financial statements provides a description of the principal differences between Chilean GAAP and U.S. GAAP, and reconciliation to U.S. GAAP of net income and shareholders’ equity for the periods indicated therein.  Financial data as of and for each of the years in the five-year period ended December 31, 2008 in the following table have been restated in constant pesos as of December 31, 2008.

 

In general, amounts are in millions except for ratios, operating data, shares and ADS data.  For the convenience of the reader, all data presented in dollars in the following summary, as of and for the year ended December 31, 2008, are converted at the Observed Exchange Rate for December 31, 2008 of Ch$ 636.45 per $ 1.00.  No representation is made that the peso or dollar amounts shown in this Report could have been or could be converted into dollars or pesos, at such rate or at any other rate.  For more information concerning historical exchange rates, see “Item 3. Key Information A. Selected Financial Data Exchange Rates” below.

 

Our principal operating subsidiaries were consolidated prior to 1998.  As of October 1, 2005, the 92.51% participation interest we held in Centrais Elétricas Cachoeira Dourada S.A., or “Cachoeira Dourada,” was contributed to Endesa Brasil and consequently ceased to be consolidated by us, which significantly affected balance sheet figures as of December 31, 2005, and revenues and related costs for 2005 and subsequent years.  See “Item 4. Information on the Company — A. History and Development of the Company,” for details on Endesa Brasil.  All companies have been consolidated according to Chilean GAAP.

 

The information detailed in the following table includes the effect of certain accounting changes for the five years ended and as of December 31, 2008, which affect the comparability presented below.  For information on changes in accounting policies see Note 3 to our consolidated financial statements.

 

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As of or for the year ended December 31, (in constant millions of Ch$)

 

 

 

2004

 

2005

 

2006

 

2007

 

2008

 

2008

 

 

 

Ch$

 

Ch$

 

Ch$

 

Ch$

 

Ch$

 

(millions
of $) (1)

 

Chilean GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from operations

 

1,277,545

 

1,341,074

 

1,563,878

 

1,880,664

 

2,491,589

 

3,915

 

Cost of operations

 

(778,395

)

(823,483

)

(927,786

)

(1,218,649

)

(1,549,013

)

(2,434

)

Administrative and selling expenses

 

(42,613

)

(46,068

)

(46,066

)

(40,381

)

(49,215

)

(77

)

Operating income

 

456,537

 

471,523

 

590,026

 

621,634

 

893,360

 

1,404

 

Equity in income (losses) of related companies, net

 

23,757

 

16,203

 

49,526

 

(11,383

)

113,657

 

179

 

Goodwill amortization

 

(1,812

)

(1,631

)

(1,103

)

(991

)

(1,185

)

(2

)

Interest expense, net

 

(219,772

)

(194,935

)

(183,743

)

(167,983

)

(166,169

)

(261

)

Price-level restatement and foreign currency translation, net

 

28,258

 

19,368

 

5,960

 

27,733

 

(30,138

)

(47

)

 

 

 

As of or for the year ended December 31, (in constant millions of Ch$)

 

 

 

2004

 

2005

 

2006

 

2007

 

2008

 

2008

 

 

 

Ch$

 

Ch$

 

Ch$

 

Ch$

 

Ch$

 

(millions
of $) (1)

 

Other non-operating expense, net

 

(34,694

)

(24,248

)

(15,906

)

(73,327

)

(861

)

(1

)

Income before income taxes, minority interest and negative goodwill amortization

 

252,274

 

286,280

 

444,760

 

395,683

 

808,664

 

1,271

 

Income taxes

 

(115,582

)

(109,806

)

(153,048

)

(123,507

)

(191,557

)

(301

)

Extraordinary loss

 

 

 

 

 

 

 

Minority interest

 

(52,952

)

(62,656

)

(77,088

)

(67,381

)

(180,686

)

(284

)

Amortization of negative goodwill

 

19,919

 

18,282

 

7,061

 

4,772

 

6,172

 

10

 

Net income

 

103,659

 

132,100

 

221,685

 

209,566

 

442,592

 

695

 

Net income per share in Ch$/$ 

 

12.63

 

16.11

 

27.03

 

25.55

 

53.96

 

0.08

 

Net income per ADS in Ch$/$ (2)

 

379.03

 

483.27

 

810.87

 

766.54

 

1.618.89

 

2.54

 

U.S. GAAP :

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from operations

 

1,277,545

 

1,341,074

 

1,563,878

 

1,880,664

 

2,491,589

 

3,915

 

Operating income

 

479,904

 

490,685

 

619,125

 

639,972

 

796,498

 

1,251

 

Equity in income of related companies, net

 

23,757

 

(17,908

)

54,484

 

(36,414

)

131,775

 

207

 

Income taxes

 

(188,383

)

(119,108

)

(162,471

)

(127,743

)

(162,454

)

(255

)

Net income (loss) from continuing operations

 

78,612

 

119,744

 

247,828

 

197,590

 

394,902

 

620

 

Cumulative effect of changes in accounting principles, net of tax and minority interest

 

1,493

 

 

 

 

 

 

Net income

 

80,105

 

119,744

 

247,828

 

197,590

 

394,902

 

620

 

Income from continuing operations per share in Ch$/$ 

 

9.59

 

14.60

 

30.21

 

24.09

 

48,15

 

0.08

 

Cumulative effect of changes in accounting principles

 

0.17

 

 

 

 

 

 

Net income per share in Ch$/$ 

 

9.77

 

14.60

 

30.21

 

24.09

 

48.15

 

0.08

 

Net income per ADS in Ch$/$ (2)

 

287.71

 

438.13

 

875.20

 

722.66

 

1,444.45

 

2.27

 

 

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As of or for the year ended December 31, (in constant millions of Ch$)

 

 

 

2004

 

2005

 

2006

 

2007

 

2008

 

2008

 

 

 

Ch$

 

Ch$

 

Ch$

 

Ch$

 

Ch$

 

(millions
of $) (1)

 

Consolidated Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Chilean GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

6,578,671

 

5,820,837

 

6,184,246

 

5,866,855

 

7,142,356

 

11,222

 

Long-term liabilities

 

2,711,321

 

2,114,296

 

2,448,228

 

2,092,644

 

2,364,004

 

3,714

 

Minority interest

 

1,394,737

 

1,115,214

 

1,093,783

 

965,815

 

1,192,717

 

1,874

 

Total Shareholders’ equity

 

1,940,941

 

1,961,098

 

2,098,600

 

2,051,923

 

2,364,524

 

3,715

 

Capital stock

 

1,331,714

 

1,331,714

 

1,331,714

 

1,331,714

 

1,331,714

 

2,092

 

U.S. GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

6,177,650

 

5,491,703

 

5,842,360

 

5,582,810

 

6,919,873

 

10,873

 

Long-term liabilities

 

2,856,971

 

2,273,211

 

2,578,315

 

2,229,327

 

2,670,071

 

4,195

 

Minority interest

 

1,286,583

 

1,023,011

 

995,591

 

816,219

 

1,035,930

 

1,628

 

Total Shareholders’ equity

 

1,475,718

 

1,531,175

 

1,688,864

 

1,738,957

 

1,905,724

 

2,994

 

Capital stock

 

1,331,714

 

1,331,714

 

1,331,714

 

1,331,714

 

1,331,714

 

2,092

 

Other Consolidated Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Chilean GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (5)

 

118,934

 

70,191

 

198,929

 

225,455

 

290,179

 

456

 

Depreciation and amortization

 

194,916

 

188,350

 

200,374

 

207,699

 

247,351

 

394

 

Cash dividends per share in Ch$/$ (3)

 

5.11

 

6.98

 

3.01

 

14.19

 

16.19

 

0.027

 

Cash dividends per ADS in $ (2)(3)(4)

 

0.00

 

0.00

 

0.16

 

0.86

 

0.76

 

 

 

Weighted average outstanding (million)

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares

 

8,202

 

8,202

 

8,202

 

8,202

 

8,202

 

8,202

 

Number of ADS

 

14

 

14

 

14

 

14

 

14

 

14

 

 


(1)          Solely for the convenience of the reader, peso amounts have been translated into dollars at the rate of Ch$ 636.45 per dollar, the Observed Exchange Rate as of December 31, 2008.

(2)          Per ADS amounts in constant pesos are determined by multiplying per share amounts by 30 (1 ADS = 30 Shares).  Per share amounts in $ are determined by dividing per ADS amounts by 30.

(3)          This chart details dividends payable in any given year, and not necessarily paid that same year.  The 2007 dividend was paid in April 2008.  The final dividend for 2008 was paid after the stockholders meeting held on April 15, 2009.

(4)          Dollar amounts are calculated by applying the dollar exchange rate on the dividend payment date to the nominal peso amount.

(5)          Capital expenditures do not include investments in equity investments and capital expenditures in development stage subsidiaries.

 

Exchange Rates

 

Fluctuations in the exchange rate between the peso and the dollar will affect the dollar equivalent of the peso price of our shares of common stock, without par value (the “Shares,” or the “Common Stock”), on the Bolsa de Comercio de Santiago (the “Santiago Stock Exchange”), the Bolsa Electrónica de Chile (the “Electronic Exchange”) and the Bolsa de Corredores de Valparaíso (the “Valparaíso Stock Exchange”) (collectively, the “Chilean Exchanges”).  These exchange rate fluctuations will likely affect the price of the Company’s American Depositary Shares (“ADSs”) and the conversion of cash dividends relating to the Shares represented by ADSs from pesos to dollars.  In addition, to the extent financial liabilities of the Company are denominated in foreign currencies, exchange rate fluctuations may have a significant impact on earnings.

 

The Ley Orgánica del Banco Central de Chile 18,840 (the “Central Bank Act”) provides that the Central Bank may require that certain purchases and sales of foreign currency be carried out in the Mercado Cambiario Formal

 

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(the “Formal Exchange Market”), a market formed by banks and other entities and explicitly authorized by the Central Bank.  Purchases and sales of foreign currency which can take place outside of the Formal Exchange Market, can be carried out in the Mercado Cambiario Informal (the “Informal Exchange Market”), which is a recognized currency market in Chile.  Free market forces drive both the Formal and Informal Exchange Markets.  Foreign currency for payments and distributions with respect to the ADSs may be purchased in either the Formal or the Informal Exchange Market, but such payments and distributions must be remitted through the Formal Exchange Market.  The Central Bank publishes daily the dólar observado (the “Observed Exchange Rate”), which is computed by taking the weighted average of the previous day’s transactions in the Formal Exchange Market.

 

Since 1993, the Observed Exchange Rate and the Informal Exchange Rate have typically been within less than 1% of each other.  On December 31, 2008, the Informal Exchange Rate was Ch$ 638.50, or 0.32% higher than the published Observed Exchange Rate of Ch$ 636.45 per $ 1.00.  On May 31, 2009, the informal exchange rate was Ch$ 561.45 per $ 1.00, 0.16% higher than the Observed Exchange Rate corresponding to such date, of Ch$ 560.58 per $ 1.00.  Unless otherwise indicated, amounts translated to dollars were calculated based on the exchange rates in effect as of December 31, 2008.

 

The following table sets forth, for the periods and dates indicated, certain information concerning the Observed Exchange Rate reported by the Central Bank.

 

 

 

Observed Exchange Rate (1)
(Ch$ per $)

 

 

 

Low

 

High

 

Average
(2)

 

Period-
end

 

Year

 

 

 

 

 

 

 

 

 

2004

 

557.40

 

649.45

 

611.11

 

557.40

 

2005

 

509.70

 

592.75

 

558.06

 

512.50

 

2006

 

511.44

 

549.63

 

529.64

 

532.39

 

2007

 

493.14

 

548.67

 

521.06

 

496.89

 

2008

 

431.22

 

676.75

 

530.48

 

636.45

 

Last six months

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

December

 

625.59

 

674.83

 

 

636.45

 

2009

 

 

 

 

 

 

 

 

 

January

 

610.09

 

643.87

 

 

617.10

 

February

 

583.32

 

623.87

 

 

599.04

 

March

 

572.39

 

614.85

 

 

583.26

 

April

 

575.12

 

601.04

 

 

580.10

 

May

 

558.95

 

580.10

 

 

560.58

 

 


Source: Chilean Central Bank.

 

(1)          Reflects pesos at historical values.

(2)          The average of the exchange rates on the last day of each month during the period.  This is not applicable to monthly data.

 

B.            Capitalization and indebtedness.

 

Not applicable.

 

C.            Reasons for the offer and use of proceeds.

 

Not applicable.

 

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D.            Risk factors.

 

Risks Relating to Our Operations in Every Country in Which We Operate

 

South American economic fluctuations are likely to affect our results from operations.

 

All of our operations are located in South America.  In 2008, we generated 44% of our consolidated operating revenues and 38% of our consolidated operating income outside Chile.  Accordingly, our consolidated revenues are sensitive to the performance of South American economies as a whole.  If local, regional or worldwide economic trends adversely affect the economy of any of the countries in which we have investments or operations, our financial condition and results from operations could be affected adversely.

 

The South American financial and securities markets are, to varying degrees, influenced by economic and market conditions in other emerging countries.  Although economic conditions are different in each country, investor reaction to developments in one country may have a significant effect on the securities of issuers in other countries, including Chile.  Chilean financial and securities markets may be affected adversely by events in other countries and such effects may affect the value of our securities.  Moreover, we have significant investments in relatively risky non-Chilean countries such as Argentina, Brazil, Colombia and Peru.  Generation and distribution of cash from subsidiaries in these countries have proven to be volatile.

 

Certain South American economies have been characterized by frequent and occasionally drastic intervention by governmental authorities, which may affect our business adversely.

 

Governmental authorities have changed monetary, credit, tariff and other policies to influence the course of the economy of Argentina, Brazil, Colombia and Peru.  These governmental actions were intended to control inflation and affect other policies have often involved wage, price and tariff rate controls as well as other interventionist measures, which have included freezing bank accounts and imposing capital controls, for example, this was the case in Argentina in 2001.  In 2008, the Argentine government nationalized the private sector pension funds.  Changes in the policies of these governmental authorities with respect to tariff rates, exchange controls, regulations and taxation could affect our business and financial results adversely, as could inflation, devaluation, social instability and other political, economic or diplomatic developments, including the response by governments in the region to such circumstances.  If governmental authorities intervene materially in any of the countries in which we operate, it could cause our business to become less profitable, and our results of operations may be affected adversely.

 

The worldwide financial crisis will have a significant adverse effect on our access to bank loans and, to a lesser degree, the capital markets, and a prolonged recession is likely to affect our results of operations.

 

The worldwide credit crisis and its disruptive effect on the financial industry is likely to have an adverse impact on our ability to obtain new bank loans under the terms and conditions that have been available to us until now.

 

Our ability to tap the capital markets in the five countries where we operate, as well as the international capital markets for other sources of liquidity, may also be diminished during the crisis, or such financing may be available only at interest levels higher than those we have experienced until now, leading to an increase in interest expense and reduced cash flows.   Reduced liquidity could, in turn, affect our capital expenditures, our long-term investments and acquisitions, our growth prospects, as well as our dividend payout policy.

 

In addition, to the extent that the five countries in which we operate experience a prolonged recession, it is likely that our customers will demand less electricity than in the past, which could affect our results of operations and financial condition adversely.  Furthermore, some of our customers may experience difficulties in paying their electricity bills, and an increase in uncollectible accounts would also affect our results adversely.

 

We are subject to refinancing risk and to debt covenants that could affect our liquidity.

 

As of December 31, 2008, on a consolidated basis, we had $ 1,051 million of indebtedness maturing in 2009 (including a put option amounting to $ 220 million exercised by holders of certain Yankee Bonds on February 1, 2009 for $ 149 million):

·                  $ 391 million in 2010,

·                  $ 546 million in 2011,

 

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·                  $ 267 million in 2012,

·                  $ 481 million in 2013, and

·                  $ 1,606 million maturing thereafter.

The same $ 1,051 million indebtedness, on a country by country basis, is as follows:

·                  $ 110 million in Argentina;

·                  $ 192 million in Colombia;

·                  $ 116 million in Peru; and

·                  $ 633 million in Chile.

 

Our debt agreements are subject to certain fairly standard debt to EBITDA and debt to equity financial covenant ratios, among others.  They also contain common affirmative and negative covenants, as well as events of default, and in some cases, mandatory prepayment events.

 

A substantial portion of our indebtedness contains cross-payment default provisions.  In the case of our Yankee Bond indentures, the cross-payment default may be potentially triggered by a default in any amount on our debt or on that of any of our subsidiaries, as long as the principal on the debt giving rise to the cross-payment default exceeds $ 30 million.  For our syndicated bank credit agreements under the laws of the State of New York, the materiality threshold for the principal on the debt potentially giving rise to the cross-payment default increases to $ 50 million, and there is an additional clause requiring that at least $ 50 million must be in default as well.  Furthermore, the bank debt facilities do not apply to all subsidiaries, as is the case with the Yankee Bonds.  In Yankee indentures and the syndicated loan contracts, the cross default is not automatic; instead, a certain minimum quorum of debt holders need to formally request acceleration.  Our local Chilean bonds, denominated in UF, on the other hand, have cross default clauses with much higher materiality thresholds than the ones detailed here.  Our non-Chilean risk debt facilities normally carry relatively low cross default materiality thresholds, in line with market practice in those countries.   In the event that any of our cross-default provisions is triggered and our existing creditors demand immediate repayment, a significant portion of our indebtedness, could become due and payable.  For more information on some of these covenants and certain relevant provisions for these credit facilities, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”

 

We may be unable to refinance our indebtedness or obtain such refinancing on terms acceptable to us.  In the absence of such refinancing, we could be forced to dispose of assets in order to make up for any shortfall in the payments due on our indebtedness under circumstances that might not be favorable to obtaining the best price for such assets.  Furthermore, assets may not be sold quickly enough, or for amounts sufficient to enable us to make such payments.

 

As of the date of this Report, Argentina is the country with the greatest refinancing risk.  As of December 31, 2008, the third-party financial debt of our Argentine subsidiaries (Endesa Costanera and El Chocón) was $ 314 million.  As a matter of policy for all of our Argentine subsidiaries, as long as fundamental issues concerning the electricity sector remain unresolved, we are rolling over most of our outstanding debt.  If our creditors do not continue to accept rolling over debt principal when it becomes due, we may be unable to refinance our indebtedness on terms otherwise acceptable to us.

 

Since our business depends heavily on hydrological conditions, drought conditions may affect our profitability.

 

Approximately 62% of our consolidated installed generation capacity is hydroelectric.  Accordingly, extreme hydrological conditions affect our business and may have a substantial influence over our results.

 

During periods of drought, thermal plants, such as ours that use natural gas, fuel oil or coal as a fuel, are dispatched more frequently.  Our operating expenses increase during these periods and, depending on the size of our commitments, we may have to buy electricity from other parties in order to comply with our contractual supply obligations.  The cost of these electricity purchases in the spot market may exceed the price at which we sell contracted electricity, thus producing losses from those contracts.

 

Our generation subsidiaries have a commercial policy in order to limit the potential impact of interruptions to our ability to supply electricity to our customers, including those caused by droughts, interruptions in gas supply and prolonged plant stoppages.  Pursuant to this policy, a level of contracts is determined for each generation company

 

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by reducing the hydrological risk to acceptable levels, assured by a degree of statistical reliability of 95%. Any contracts for volumes that exceed this 95% level are required to include clauses transferring the risk of interruptions and its related costs to the customers.  Notwithstanding this risk-reduction policy, a prolonged drought will adversely affect our results.

 

Governmental regulations may impose additional operating costs which may reduce our profits.

 

We are subject to extensive regulation of tariffs and other aspects of our business in the countries in which we operate and these regulations may adversely affect our profitability.  In addition, changes in the regulatory framework, including changes that if adopted would significantly affect our operations, are often submitted to the legislators and administrative authorities in the countries in which we operate and could have a material adverse impact on our business.  For instance, in 2005 there was a change in Water Rights Law in Chile that requires us to pay for all the unused water rights.

 

The Chilean government can impose electricity rationing during drought conditions or prolonged failures in power facilities.  If, during rationing, we are unable to generate enough electricity to comply with our contractual obligations, we may be forced to buy electricity in the pool market at the spot price, since even a severe drought does not constitute a force majeure event.  The spot price may be significantly higher than our costs to generate the electricity and can be as high as the “cost of failure” set by the National Energy Commission, or the CNE.  The “cost of failure” is determined semiannually by the CNE’s economic models as the highest cost of electricity during periods of electricity deficit.  If we are unable to buy enough electricity in the pool market to comply with all of our contractual obligations, then we would have to compensate our regulated customers for the electricity we failed to provide at the rationed price.  If material rationing policies are imposed by regulatory authorities in Chile, our business, financial condition and results from operations may be affected adversely in a material way.

 

Similarly, if material rationing policies are imposed by any regulatory authority as a result of adverse hydrological conditions in the other countries in which we operate, our business, financial condition and results of operations may be affected adversely in a material way.  Rationing periods may occur in the future and, consequently, our generation subsidiaries may be required to pay regulatory penalties if such subsidiaries fail to provide adequate service under such conditions.

 

Regulatory authorities may impose fines on our subsidiaries.

 

In Chile, our electricity businesses may be subject to regulatory fines for any breach of current regulations, including energy supply failure.  Such fines may range from 1 Unidad Tributaria Mensual, or $ 59, to 10,000 Unidades Tributarias Anuales, or $ 7.1 million, in each case using the UTM, UTA and foreign exchange rate for December 31, 2008.  Any electricity company supervised by the Chilean Superintendence of Electricity and Fuels, or SEF, may be subject to these fines in cases where, in the opinion of the SEF, operational failures that affect the regular energy supply to the system are the fault of such company; for instance, when the coordination duty of the system agents is not fulfilled, even when it is not within the company’s control to prevent such failures

 

Our generation subsidiaries may be required to pay fines or to compensate customers if those subsidiaries are unable to deliver electricity to them even if such failure is due to forces outside of our control.

 

In 2003, the SEF imposed fines on some of our Chilean generation subsidiaries in an aggregate amount of 5,330 UTA, or $ 3.8 million, due to their failure to transmit energy in the Metropolitan Region in 2002.

 

In 2004, the SEF imposed fines on us in an aggregate amount of 2,030 UTA due to a blackout that occurred in the Metropolitan Region in 2003.  As a result of an administrative resolution, these fines have since been reduced to 1,610 UTA, or $ 1.1 million.

 

In 2005, the SEF imposed fines of 1,260 UTA, or $ 0.9 million, on us due to a blackout that occurred in the Metropolitan Region in 2003.

 

On February 17, 2009, the SEF imposed fines on Endesa Chile, Pehuenche and San Isidro for 200, 200 and 100 UTA, respectively, or $ 0.3 million in total, due to an agreement in the CDEC-SIC.

 

We are currently appealing all these fines, but these appeals may be unsuccessful.

 

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We depend in part on payments from our subsidiaries and affiliates to meet our payment obligations.

 

In order to pay our obligations, we rely in part on cash from dividends, loans, interest payments, capital reductions and other distributions from our subsidiaries and equity affiliates, as well as cash from proceeds of the issuance of new securities.  The ability of our subsidiaries and equity affiliates to pay dividends, interest payments, loans and other distributions to us is subject to legal constraints such as dividend restrictions, fiduciary duties, contractual limitations and foreign exchange controls that may be imposed in any of the five countries where they operate.

 

Historically, we have been able to access the cash flows of our Chilean subsidiaries, but we have not been similarly able to access at all times the cash flows of all of our non-Chilean operating subsidiaries due to government regulations, strategic considerations, economic conditions, and credit restrictions.

 

Our future results from operations outside Chile may continue to be subject to greater economic and political uncertainties than what we have experienced in Chile, thereby reducing the likelihood that we will be able to rely on cash flow from operations in those entities to repay our debt.

 

Dividend Limits and Other Legal Restrictions.  Some of our non-Chilean subsidiaries are subject to legal reserve requirements and other restrictions on dividend payments.  In addition, the ability of any of our subsidiaries which are not wholly-owned to distribute cash to us may be limited by the fiduciary duties of the directors of such subsidiaries to their minority shareholders.  As a consequence of such duties, our subsidiaries could, under certain circumstances, be prevented from distributing cash to us.

 

Contractual Constraints.  Distribution restrictions in our subsidiaries’ contractual agreements include the following:  prohibitions against dividend distributions by many companies in the case of default, in Empresa Eléctrica Pangue S.A., or Pangue, one of our Chilean generation subsidiaries, if it is not in compliance with certain debt-to-equity ratio and debt coverage ratio (in each case, as defined in Pangue’s credit agreement that matures in January 2010); prohibitions against dividend distributions, capital reductions, intercompany interest payments and debt repayment by Endesa Costanera and El Chocón in Argentina, in each case in the case of default and if not in compliance with certain financial ratios.

 

Operating Results of Our Subsidiaries.  The ability of our subsidiaries and equity affiliates to pay dividends or make loan payments or other distributions to us is limited by their operating results.  To the extent that the cash requirements at any of our subsidiaries exceed available cash, such subsidiary will not be able to make cash available to us.

 

Foreign Currency Controls.  The ability of our non-Chilean subsidiaries and equity affiliates to pay dividends and make loan payments or other distributions to us may be subject to emergency restrictions that may be imposed by Central Banks or other governmental authorities in the various jurisdictions in which we operate.  For example, during the economic crisis in Argentina, the Central Bank of Argentina imposed restrictions on the transfer of funds outside the country.

 

Foreign exchange risks may adversely affect our results and the dollar value of dividends payable to ADS holders

 

The South American currencies in which we and our subsidiaries operate have been subject to large devaluations and appreciations against the dollar and may be subject to significant fluctuations in the future.

 

Historically, a significant portion of our consolidated indebtedness has been denominated in dollars and, although a substantial portion of our revenues are linked to dollars, we generally have been and will continue to be materially exposed to fluctuations of our local currencies against the dollar because of time lags and other limitations in the indexation of our tariffs to the dollar.

 

Because of this exposure the cash generated by our subsidiaries can be diminished materially when the local currencies devalue against the dollar.  Future volatility in the exchange rate of the currencies in which we receive revenues or incur expenditures, may affect our financial condition and results from operations.  For more information on the risks associated with foreign exchange rates, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

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As of December 31, 2008, using financial instead of accounting conventions, Endesa Chile’s total consolidated financial debt was $ 4,343 million (net of currency hedging instruments).  Of this amount $ 2,798 million, or 64%, was denominated in dollars and $ 658 million was denominated in pesos.  In addition to the dollar and the peso, our foreign currency denominated consolidated indebtedness included the equivalent of:

 

·                  $ 694 million in Colombian pesos,

·                  $ 149 million in soles, and,

·                  $ 45 million in Argentine pesos,

for an aggregate of $ 1,546 million in currencies other than dollars.

 

For the twelve-month period ended December 31, 2008, our operating revenues amounted to $ 3,915 million of which:

·                  $ 744 million, or 19%, was denominated in dollars,

·                  $ 1,916 million, or 49%, was linked in some way to the dollar, and

·                  $ 88 million were revenues in pesos.

 

In the aggregate, 68% of our revenues was either in dollars or tied to dollars through some form of indexation.  Revenues before consolidation adjustments in other currencies for the twelve-month period ended December 31, 2008, included the equivalent of $ 542 million in Colombian pesos, $ 5,555 million in Argentine pesos, and $ 70 million in soles.

 

Despite the fact that we generate revenues and incur debt in these same currencies, we believe that we are subject to risk in terms of our foreign exchange exposure to these four currencies.  The most material case is that of Argentina, where most of our debt is denominated in dollars while our revenues are mostly in Argentine pesos.

 

Furthermore, trading in the shares of our common stock underlying American Depositary Shares (ADSs) is conducted in pesos.  Our depositary bank will receive cash distributions that we make with respect to the shares underlying the ADSs in pesos.  The depositary bank will convert such pesos to dollars at the then-prevailing exchange rate to make dividend and other distribution payments in respect of ADSs.  If the peso depreciates against the dollar, the value of the ADSs and any dollar distributions ADS holders receive from the depositary bank will decrease.

 

Construction of new facilities may be affected adversely by factors associated with these projects.

 

Factors that may adversely affect our ability to build new facilities include:  delays in obtaining regulatory approvals, including environmental permits; shortages or increase in the prices of equipment, materials or labor; opposition by local or international political, environmental and ethnic groups; strikes; adverse changes in the political and regulatory environment in the countries where we and our affiliates operate; adverse weather conditions; natural disasters, accidents or other unforeseen events; and the inability to obtain financing at affordable rates.

 

Any of these factors may cause delays in the completion of all or part of our capital investments program and may increase the cost of the projects.

 

We are involved in litigation proceedings.

 

We are currently involved in various litigation proceedings, which could result in unfavorable decisions or financial penalties against us, and we will continue to be subject to future litigation proceedings, which could have material adverse consequences to our business.

 

We are a party to a number of legal proceedings, some of which have been pending for several years.  Some of these claims may be resolved against us.  Our financial condition or results from operations could be adversely affected in a material way if certain of these material claims are resolved against us.  See Note 29 to our audited consolidated financial statements.

 

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The values of our subsidiaries’ long-term energy supply contracts are subject to fluctuations in the market prices of certain commodities.

 

We have economic exposure to fluctuations in the market prices of certain commodities as a result of the long-term energy sales contracts we have entered into.  Our subsidiaries have material obligations under long-term fixed-price electricity sales contracts, the values of which fluctuate with the market price of electricity.  In addition, we have material obligations as selling parties under long-term energy supply contracts with prices that vary in accordance with the market price of electricity, which, in turn, depends on water levels in reservoirs, the market prices of commodities such as natural gas, oil, coal and other energy-related products, as well as the dollar exchange rate.  Changes in the market price of these commodities and in the dollar exchange rate do not always correlate with changes in the market price of electricity or with our cost of production of electricity.  Accordingly, there may be times when the price paid to us under these contracts is less than our cost of production or acquisition of electricity.  We do not carry out transactions in commodity derivative instruments to manage our exposure to commodity price fluctuations.  Under Chilean GAAP, our income statement does not reflect fluctuations in the fair value of our long-term energy contracts, although we are required to do so under U.S. GAAP.  For further discussion, please refer to “Item 11. Quantitative and Qualitative Disclosures About Market Risk — Commodity Price Risk.”

 

Our controlling shareholders may have conflicts of interest relating to our business.

 

ENEL S.p.A. (“Enel”) holds majority control of ENDESA, S.A. (“Endesa Spain”) share capital; Enel and Acciona jointly held 92.06% of Endesa Spain, which currently owns 60.6% of Enersis’ share capital, and Enersis beneficially owns 60% of Endesa Chile’s outstanding capital stock (Enel, Endesa Spain and Enersis, collectively the “Controllers”).  The Controllers have the power to determine the outcome of most material matters that require shareholder vote, such as the election of the majority of our board members and, subject to contractual and legal restrictions, the distribution of dividends.  The Controllers also can exercise influence over our operations and business strategies.  Our Controllers’ interests may in some cases differ from those of our other shareholders.  The Controllers conduct their business in South America primarily through us and through entities not consolidated by us or in which we have no interest.

 

Environmental regulations in the countries in which we operate may increase our costs of operations.

 

Our operating subsidiaries are also subject to environmental regulations, which, among other things, require us to perform environmental impact studies for future projects and obtain permits from both local and national regulators.  Approval of these environmental impact studies may be withheld by governmental authorities.  In addition, public opposition may cause delays or modifications to any proposed project and laws or regulations may change or be interpreted in a manner that could adversely affect our operations or our plans for companies in which we hold investments.  See “Item 4. Information on the Company — B. Business Overview —Electricity Industry Regulatory Framework.”

 

The Argentine natural gas crisis has increased the vulnerability of the electricity sector in Chile.

 

In Argentina, the low price imposed by regulators on natural gas has directly affected production and investment in natural gas fields, which has impacted the short and medium-term availability of natural gas, both in Chile and in Argentina.  The low price has also induced Argentine customers to increase their demand.  A natural gas shortage has forced electricity generation companies, including ours, to use more expensive fuel oil, thus substantially increasing production costs.  Energy demand in Chile’s central region decreased by 0.9% in 2008 but it is expected to increase in the long term.  Increasing demand, combined with a low level of mid-term investment in the electricity sector, particularly exposes the Chilean electricity sector to the adverse effects of the Argentine natural gas crisis.  Since 2004, Chile has been affected by increasing restrictions in the supply of natural gas from Argentina despite the existence of long-term contracts.

 

Our combined cycle plant, San Isidro, and both units in Taltal operate with natural gas and diesel oil.  Our related company, GasAtacama, also operates with natural gas and diesel oil.  Each company has gas contracts with Argentine suppliers and has been affected adversely by restrictions of natural gas from Argentina.  The materiality of the impact in the future will depend on the level of natural gas restrictions, the contractual commitments of each company, and the availability of alternative sources such as LNG.  Currently a 9.6 million m3/d (2.5 mtpa) LNG regasification terminal is being developed in Chile and is expected by its promoters to start operations during the second half of 2009; however, no assurances can be given as to when the LNG plant will come on line, the level of

 

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its actual production, or whether it will have a material positive effect our operating costs. One of the promoters of this project is Endesa Chile. For additional information, please see “Item 4. Information on the Company — A History and Development of the Company — Investments, Capital Expenditures and Divestitures.”

 

The relative illiquidity and volatility of Chilean securities markets could affect the price of our ADSs and common stock adversely.

 

Chilean securities markets are substantially smaller and less liquid than the major securities markets in the United States.  In addition, Chilean securities markets may be affected materially by developments in other emerging markets.  The low liquidity of the Chilean market may impair the ability of holders of ADSs to sell shares of our common stock withdrawn from the ADS program into the Chilean market in the amount and at the price and time they wish to do so.

 

We have outstanding credit facilities with “change of control” provisions which could result in some acceleration rights on such indebtedness.

 

Approximately 26% of the amount outstanding in our consolidated debt obligations has “change of control” contractual provisions.  As of December 31, 2008, $ 1,145 million of Endesa Chile’s consolidated indebtedness had some kind of “change of control” provision either in the form of a negative covenant, a mandatory prepayment or otherwise.  However, $ 378 million in Endesa Chile’s subsidiaries’ contracts either (a) require a preliminary merger or spin-off prior to triggering such change of control provision, or (b) the change of control does not apply to Endesa Spain but to the other companies instead.

 

A total of $ 766 million Endesa Chile’s consolidated indebtedness has “change of control” provisions which specifically refer to Endesa Spain, directly or indirectly, as the controlling entity.

 

Approximately $ 450 million of Endesa Chile debt are to be found in revolving credit facilities governed by the laws of the State of New York.  Lenders on such facilities, on an individual basis, have rights to accelerate payment if Endesa Spain is no longer, directly or indirectly, in the chain of control, provided that the new controlling entity does not satisfy certain minimum risk rating standards, which vary among the different debt facilities.

 

If a tender offer for Endesa Spain is successful, and if a change of control were to take place, we cannot give assurances that our lenders would waive any acceleration rights that they might otherwise have under such credit agreements.  For more detailed information on Endesa Chile contractual provisions, see “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources.

 

Lawsuits against us brought outside of Chile or complaints against us based on foreign legal concepts may be unsuccessful.

 

All of our assets are located outside of the United States.  All of our directors and officers reside outside of the United States and most of their assets are located outside the United States as well.  If any shareholder were to bring a lawsuit against our directors, officers or experts in the United States, it may be difficult for them to effect service of legal process within the United States upon these persons or to enforce against them, in United States courts or Chilean courts, judgments obtained in United States courts based upon the civil liability provisions of the federal securities laws of the United States.  In addition, there is doubt as to whether an action could be brought successfully in Chile on the basis of liability based solely upon the civil liability provisions of the United States federal securities laws.

 

Our business is dependent on the Chilean economy and our revenues are sensitive to its performance.

 

A substantial portion of our assets and operations are located in Chile and, accordingly, our financial condition and results of operations are to a certain extent dependent upon economic conditions prevailing in Chile.  In 2008, the Chilean economy grew by 3.2% compared to a 5.1% increase in 2007.  The latest Chilean Central Bank estimate for growth in 2009, however, is in the -0.75 — 0.25% range.  There is no assurance that such growth will be achieved, that the growth trend will continue in the future, or that future developments in the Chilean economy will not impair our ability to proceed with our strategic plans or adversely impact our financial condition or results of operations.  Our financial condition and results from operations could also be affected by changes in economic or other policies of the Chilean government, which has exercised and continues to exercise a substantial influence over many aspects of the private sector.  In addition, our financial condition and results of operations could also be

 

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affected by other political or economic developments in Chile, a well as regulatory changes or administrative practices of Chilean authorities, over which we have no control.

 

Item 4.   Information on the Company

 

A.            History and Development of the Company.

 

Incorporation and Contact Information of the Company

 

Empresa Nacional de Electricidad S.A. (“Endesa Chile”) is a publicly held limited liability stock company incorporated under the laws of the Republic of Chile on December 1, 1943.  Since 1943, the Company has been registered in Santiago with the SVS under Registration No. 0114.  The Company is commercially referred to as both Endesa and Endesa Chile.

 

The Company’s contact information in Chile is:

 

Main office:

Santa Rosa 76, Santiago, Chile

Mailing Address:

C.P. 8330099, Santiago

Telephone:

(562) 630-9000

Fax:

(562) 635-3938

 

The Company’s authorized representative in the United States of America is Puglisi & Associates, whose contact information is:

 

Main office:

850 Library Avenue, Suite 204, Newark, Delaware

Mailing Address:

P.O. Box 885, Newark, Delaware, 19711

Telephone:

(1-302) 738-6680

Fax:

(1-302) 738-7210

 

Development of the Company

 

The Chilean government owned Endesa Chile from its incorporation in 1943 until we were privatized in 1987 through a series of public offerings which were completed in 1989.

 

In May 1992, Endesa Chile began its international expansion program with the following acquisitions:

 

·      we acquired a stake in Endesa Costanera in 1992 and later, in August 1993, we acquired a controlling equity interest in El Chocón, both in Argentina; in March 2007 Endesa Chile increased its equity interest in El Chocón from 47.44% to 65.37% and in Endesa Costanera from 64.26% to 69.76%.

 

·      we acquired Edegel in Peru in October 1995; in June 2006, there was a merger between Edegel and Etevensa, after which Endesa Chile’s equity interest became 33.06% of its Peruvian assets.

 

·      we acquired Betania and Emgesa, both in Colombia, in December 1996 and in October 1997, respectively. In September 2007 both subsidiaries were merged into Betania, which then changed its name back to Emgesa S.A. E.S.P.; as of December 2008 Endesa Chile’s equity interest in Emgesa was 26.87%.

 

·      we acquired Cachoeira Dourada in Brazil in September 1997.  Since October 2005, Cachoeira Dourada has been a subsidiary of Endesa Brasil.

 

Recent Developments

 

Since October 10, 2007, the Italian energy company, Enel, and the Spanish construction company, Acciona, jointly hold 92.1% of the share capital of Endesa Spain, which in turns owns 60.6% of Enersis.  Enersis owns 60% of Endesa Chile’s capital stock.

 

On February 20, 2009, Acciona and Enel announced that they had reached an agreement pursuant to which Acciona, directly and indirectly, will transfer to Enel Energy Europe S.r.L., a wholly-owned Enel subsidiary, a 25.0% equity interest in Endesa Spain.  The transfer is subject to approval by relevant authorities and various other

 

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conditions.  Assuming the conditions are satisfied, Enel Energy Europe S.r.L. will hold a 92.1% equity interest in Endesa Spain.

 

Under the agreement, Enel committed to pay Acciona € 11,107 million for the equity interest.  Additionally, Endesa Spain agreed to transfer to Acciona wind power and hydroelectric energy assets located in Spain and Portugal valued at € 2,890 million.  The transfer of shares and assets is expected to be completed by the end of August 2009.  The agreement between Enel and Acciona was filed with the Spanish CNMV (Comisión Nacional del Mercado de Valores) as an “essential fact” on February 20, 2009, and may be found on the CNMV web site (www.cnmv.es).

 

Investments, Capital Expenditures and Divestitures

 

Our capital expenditures and investments during 2008 included investments of Ch$ 305 billion ($ 479 million) primarily in Chile and Argentina and capital expenditure maintenance of Ch$ 90 billion ($ 141 million) in all our operating subsidiaries.  As of December 31, 2008 we expected to make capital expenditures of approximately Ch$ 2,463 billion ($ 3.9 billion) over the next five years.  Although we have considered how these investments will be financed as part of the Company’s budget process, we have not committed to any particular financial structure and the financing will depend on the market conditions at the time the cash flows are needed.

 

In mid January 2008, two months ahead of schedule, the San Isidro II plant completed the combined cycle and achieved a total capacity of 353 MW.  Taking into account both the open and combined cycle stages, the project required a total investment of $ 233 million.  Once liquefied natural gas (LNG) is available in Chile, the plant will reach its full capacity of 377 MW, by July 2009.  The early start-up of this plant helped provide support for the complex energy supply situation experienced in Chile in early 2008 as a result of the Argentine natural gas crisis.

 

Endesa Chile began the operation of unit No.1 of the Taltal plant with 120 MW additional installed capacity due to its operation with diesel, since the unit that was originally designed to operate with Argentine natural gas.

 

On June 27, 2008, Endesa Eco started operating its Ojos de Agua pass­through hydroelectric plant, located close to the Cipreses power station, downstream from Lake La Invernada.  The investment cost of this 9 MW plant was $ 28 million.

 

Reinforcing Endesa Chile’s commitment to sustainability and non-conventional renewable energy (“NCRE”) development initiatives, following the commercial start-up in December 2007 of the Canela 18 MW wind farm, our subsidiary, Endesa Eco, acquired adjoining land and entered into a supply agreement for 40 wind-generators that will produce an additional 60 MW with Acciona Windpower, with an estimated investment of $ 150 million.  The environmental impact declaration (“EID”) received a favorable qualification resolution from the Corema, the regional environmental authority.  On December 10, civil works contract was awarded to the construction company Logro, a subsidiary of Sigdo Koppers.  We expect the wind farm should start operations in the last quarter of 2009.

 

As part of its strategy for ensuring reliable and diversified energy sources, the Company is actively taking part in the Chilean government-promoted initiative to diversify the energy matrix through the Quintero LNG project, with a 20% holding in the ownership of the re-gasification terminal, together with Enap, Metrogas and British Gas, as gas supplier.  Its estimated investment cost is approximately $ 1.1 billion and operations are scheduled to start in July 2009.

 

In August 2008, the Corema issued an environmental qualification resolution with the approval of the EID for the Quintero thermal-generation project, consisting of an open cycle to operate with diesel oil until LNG is available.  The plant will have a capacity of 250 MW and will be located alongside the Quintero regasification plant.  Endesa Chile awarded to General Electric the supply of two 125 MW turbines and, in January 2008, it awarded the EPC contract to Sigdo Koppers.  As of December 18, all the equipment for the project had already arrived at the site, thus enabling the beginning of assembly work.  The total investment cost in the Quintero project is estimated to be approximately $ 140 million and start-up is expected during the first half of 2009.

 

Construction works have continued on the Bocamina II coal-fired plant in the town of Coronel in Chile’s Eighth Region.  With a capacity of 370 MW, this plant will have the latest technologies for reducing emissions and is expected to commence operations in the second half of 2010.  The estimated investment is $ 700 million.

 

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On April 16, 2008, the Maule regional environmental authority approved the environmental impact assessment of the Los Cóndores pass-through hydroelectric project, with a capacity of approximately 150 MW and an average annual generation of 560 GWh.  This plant will use the waters of Lake Maule and will be located to the east of the Cipreses and Isla power stations, in San Clemente, Talca.  The estimated investment is approximately $ 400 million and its start up is planned for the first quarter of 2013.  Construction work began in the first quarter of 2009.

 

The Colombian Ministry of Mines and Energy assigned Emgesa’s El Quimbo hydroelectric project to start providing energy by December 2014.  With an estimated investment of over $ 650 million, the project will have an installed capacity of 400 MW and will be built in Huila on the river Magdalena, upstream from the Betania plant.

 

In Peru, a turnkey contract was signed in January 2008 with Siemens Power Generation for the installation of a 188 MW turbine at the Santa Rosa plant, which will operate with gas from Camisea, a project that will require an investment of approximately $ 90 million and is planned to come into service by the end of 2009This project will increase Edegel’s installed capacity from 1,467 MW to 1,654 MW and enable it to keep up with fast-growing electricity demand in the Peruvian market.

 

In Argentina, Endesa Chile has been taking part since 2005 in the Foninvemem fund that is building two thermal plants of 800 MW each.  Endesa Chile will hold a 21% equity interest through Endesa Costanera and El Chocón.  At the end of 2008, 1,125 MW were operating in open cycle.  The project is expected to start operations in combined cycle during 2009.

 

The table below sets forth the capital expenditures made by our subsidiaries in 2008 and expected capital expenditures for the period 2009-2013:

 

CAPITAL EXPENDITURES OF ENDESA CHILE AND ITS SUBSIDIARIES

 

 

 

(in millions of $) (1)

 

 

 

2006

 

2007

 

2008

 

2009-2013

 

Chile

 

241.3

 

408.3

 

397.2

 

1,391.6

 

Argentina

 

28.3

 

34.9

 

48.3

 

245.2

 

Colombia

 

36.6

 

32.3

 

33.5

 

838.3

 

Peru

 

94.5

 

23.7

 

82.9

 

196.6

 

Total

 

400.7

 

499.3

 

561.9

 

2,671.7

 

 


(1)   Figures for 2006, 2007 and 2008 are in historical dollars. Figures for 2009-2013 are expressed in dollars at exchange rates projected in company’s estimates.

 

We have carried out some investments, divestitures and other reorganizations in the last five years in order to implement our strategy, including the following:

 

·      On April 18, 2005, Endesa Chile and its subsidiary Endesa Inversiones Generales S.A. (“ENIGESA”), created a new subsidiary Endesa Eco S.A.;

 

·      On May 24, 2005, the Board of Endesa Chile approved the constitution of the holding company in Brazil with the name of Endesa Brasil S.A., which received the contribution of existing assets in that country owned by Endesa Internacional, Endesa Chile, Enersis and Chilectra.  As of October 1, 2005, the total participation interest Endesa Chile held in Cachoeira Dourada, and in Companhia de Interconexao Energética S.A., “CIEN”, in Compañía de Transmisión del Mercosur S.A. (“CTM”) and in Transportadora de Energía del Mercosur S.A. (“TESA”) was transferred to this new entity, which translated into an economic interest of 37.8% for Endesa Chile in Endesa Brasil as of December 31, 2005 (37.65% as of December 2008).  The purpose of this asset reorganization was to provide greater stability of local cash flows by being managed centrally, and the optimization of financing costs.  It will also improve financing from third parties and strengthen the group’s positioning to take advantage of new investment opportunities, making it the fourth integrated private sector electric utility in Brazil.

 

·      On October 3, 2005, the Board of Endesa Chile approved the dissolution and liquidation of the investment company Lajas Inversoras S.A., which owned 99.61% of the Brazilian company Cachoeira Dourada.  The

 

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assets of this company were distributed between its shareholders in proportion to their participation in the company.

 

·      On November 16, 2005, GNL Chile S.A. was established to develop the liquefied natural gas project in Chile.  The company was formed by Endesa Chile, ENAP and Metrogas, with equal equity participation.  On March 17, 2007, the three companies and British Gas, a GNL supplier, established GNL Quintero S.A., to construct, maintain and operate the regasification terminal.  The equity interests in GNL Quintero S.A. are held by British Gas (40%), Endesa Chile (20%), ENAP (20%) and Metrogas (20%).

 

·      As of December 13, 2005, Endesa Chile, through its Argentine subsidiaries, El Chocón and Endesa Costanera, participates in two new companies, Termoeléctrica Manuel Belgrano S.A. and Termoeléctrica José de San Martín S.A., with a 15.4% and a 5.5% share interest, respectively, in each new company.  The expected start-up date for the Manuel Belgrano power plant is in the first half of 2009 and in the second half of 2009 for José de San Martín.  Since then the companies will begin to recover their credits from the cash flows generated by the project under the ten-year production sales contract with the Mercado Eléctrico Mayorista, or MEM. (See “ — B. Business Overview. Operations in Argentina” for details).

 

·      On June 1, 2006, the merger between Endesa Chile’s Peruvian subsidiary, Edegel and Etevensa, a subsidiary of Endesa Internacional, was completed.  During October, the combined cycle of Ventanilla plant’s second boiler was closed, leaving its final capacity at 457 MW.

 

·      Centrales Hidroeléctricas de Aysén S.A., “HidroAysén”, a long-term investment company, was formed on September 4, 2006.  Endesa Chile has a 51% holding and Colbún S.A. holds the remaining 49%.  The environmental impact assessment (EIA) for the 2,750 MW hydroelectric project was submitted to the environmental authority on August 14, 2008.  The EIA was prepared by an international consortium comprised of SWECO, POCH Ambiental and EPS, and involved a total investment of $ 14 million.  The EIA is in process and the first request for clarifications has been issued, for which the company is preparing answers. On August 1, 2008, HidroAysén mandated the transmission company Transelec to carry out the design and route studies for the construction and transmission of the high voltage direct current (HVDC) line to provide energy and power to the SIC.

 

·      On February 28, 2007, Endesa acquired 19,574,798 ordinary shares from Southern Cone Power Argentina S.A., which holds 5.5% of the share capital of Endesa Costanera.  The investment was $ 9.5 million.  As a result of this purchase, Endesa Chile’s beneficial interest in Endesa Costanera increased from 64.3% to 69.8%.

 

·      On March 8, 2007, Endesa Chile acquired a total of 4,467,500 shares from CMS Generation Co. and CMS Generation S.R.L., representing 25% of the share capital of Hidroinvest S.A., the Argentine holding company and controller of El Chocón, and also acquired 7,405,768 direct shares of El Chocón.  The total purchase price was $ 50 million, which included the debt that Hidroinvest S.A. owed to CMS.  With this purchase, the beneficial interest of Endesa Chile in Hidroinvest S.A. increased from 69.9% to 96.1%, and strengthens our control of El Chocón, which is 59%-controlled by Hidroinvest S.A.  As a result of the foregoing share purchases, Endesa Chile increased its beneficial interest in El Chocón from 47.4% to 65.4%.

 

·      On June 30, 2007, Endesa Chile notified CMS Enterprises Company (CMS) of its decision to exercise its right of first offer granted by CMS for their interests in the companies and vehicles that conform GasAtacama.  On this same date, Endesa Chile and Southern Cross Latin America Private Equity Fund III, L.P. (“Southern Cross”) executed a sale and purchase agreement for 50% of the participation of Endesa Chile in the GasAtacama and of the sponsor loans associated to this participation, to the Southern Cross fund.  As a result of the foregoing, Endesa Chile and Southern Cross each own 50% of GasAtacama.

 

·      On September 1, 2007 the Colombian companies Emgesa S.A. E.S.P. and Central Hidroeléctrica Betania S.A. E.S.P. were merged into the latter, which then changed its name to Emgesa S.A. E.S.P.  As a result, Endesa Chile’s direct and indirect shareholding in the merged company, Emgesa S.A. E.S.P., is 26.9%. This new corporate structure offers advantages for the management of Colombian financial transactions.

 

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B.            Business Overview.

 

We are a publicly traded electric generation company with operations in Chile, Argentina, Colombia and Peru and an equity interest in Brazil.  Our core business is electricity generation.  We also participate in the engineering services industry and have a tunnel concession.  The low proportion of non-generation contribution, less than 1.5% in terms of revenues, does not justify the breakdown of revenues per activity.

 

Our consolidated installed capacity, as of December 31, 2008, was 12,906 MW, with 61.9% hydroelectric capacity, 38.0% thermal electric and 0.1% wind power generation capacity. Total installed capacity is defined as the maximum power capacity (measured in MW generation units), under specific technical conditions and characteristics.

 

We own and operate 26 generation facilities in Chile with an aggregate installed capacity, as of December 31, 2008, of 4,893 MW, compared to 4,779 MW in 2007.  The main increase in our total installed capacity in Chile is the addition of approximately 105 MW in San Isidro II and the incorporation of Ojos de Agua (9 MW, mini hydroelectric) in June 27, 2008.  The San Isidro project started operations in open cycle in April 2007, and in combined cycle in January 2008.  We accounted for 36.5% of Chile’s total generation capacity as of December 31, 2008 measured by the maximum capacity calculated by CDEC-SIC.  Hydroelectric installed capacity represents 70.7% of Endesa Chile’s total installed capacity in Chile.  CDEC is the electricity dispatch center in the corresponding electric system.  See “— B. Business Overview — Electricity Industry and Regulatory Framework.”

 

As of December 31, 2008, we also had interests in 25 generation facilities outside of Chile with an aggregate installed capacity of 8,014 MW, compared to 7,941 MW in 2007.  The main changes to our total installed capacity outside Chile are in Colombia with Cartagena (66 MW), and in Argentina with Arroyito (8 MW).  For additional detail on capacity increase of these units see “— D. Property, Plant and Equipment.”  Hydroelectric installed capacity outside Chile represents 56.5% of Endesa Chile’s total installed capacity outside Chile. Based on 2008 figures, the Company’s installed generation capacity in Argentina, Colombia and Peru represents approximately 14%, 21% and 28% of total capacity in each country, respectively.

 

The following table sets out information relating to Endesa Chile’s electricity generation:

 

ENDESA CHILE’S CONSOLIDATED HYDRO/THERMAL GENERATION (GWh)(1)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

 

 

(GWh)

 

%

 

(GWh)

 

%

 

(GWh)

 

%

 

Hydroelectric generation

 

38,617

 

73

 

32,687

 

65

 

32,315

 

63

 

Thermal generation

 

14,332

 

27

 

17,796

 

35

 

18,949

 

37

 

Other generation (Wind)

 

 

 

 

 

3

 

0

 

30

 

0

 

Total generation

 

52,949

 

100

 

50,486

 

100

 

51,294

 

100

 

 


(1)   Generation minus power plants’ own consumption and technical losses.

 

Our consolidated electricity production reached 51,294 GWh in 2008, 1.6% higher than the 50,486 GWh produced in 2007.  Argentina was the country which most reduced generation from 12,117 GWh in 2007 to 10,480 GWh in 2008, a decrease of 13.5%.  Colombia was the country which most increased generation from 11,942 GWh in 2007 to 12,905 GWh in 2008, an increase by 8.1%.  Hydroelectric generation, in 2008 in the four countries in which we consolidate the results from our operations, was 1% lower than in 2007 and thermal generation in 2008 was 6.5% higher than in 2007.

 

Our consolidated physical energy sales for 2008 were 55,734 GWh, 0.9% higher than our consolidated physical energy sales of 55,225 GWh in 2007.  The main increases in sales were in Peru and Colombia, and the main reduction was in Argentina as illustrated in the following table:

 

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ENDESA CHILE PHYSICAL DATA PER COUNTRY

 

 

 

As of and for the year ended December 31

 

 

 

2006

 

2007

 

2008

 

Argentina

 

 

 

 

 

 

 

Number of generating facilities (1)

 

5

 

5

 

5

 

Installed capacity (MW) (2)

 

3,638.7

 

3,644.1

 

3,652.1

 

Energy generated (GWh) (3)

 

13,750.3

 

12,117.1

 

10,480.2

 

Energy sales (GWh)

 

13,926.3

 

12,406.3

 

11,097.7

 

Chile

 

 

 

 

 

 

 

Number of generating facilities (1)

 

22

 

25

 

26

 

Installed capacity (MW) (2)

 

4,476.7

 

4,779.2

 

4,892.9

 

Energy generated (GWh) (3)

 

19,973.2

 

18,773.0

 

19,807.1

 

Energy sales (GWh)

 

20,922.8

 

19,212.1

 

19,808.0

 

Colombia

 

 

 

 

 

 

 

Number of generating facilities (1)

 

11

 

11

 

11

 

Installed capacity (MW) (2)

 

2,778.7

 

2,828.7

 

2,894.7

 

Energy generated (GWh) (3)

 

12,564.0

 

11,941.8

 

12,905.1

 

Energy sales (GWh)

 

15,326.9

 

15,613.1

 

16,367.9

 

Peru

 

 

 

 

 

 

 

Number of generating facilities (1)

 

9

 

9

 

9

 

Installed capacity (MW) (2)

 

1,425.5

 

1,468.0

 

1,466.8

 

Energy generated (GWh) (3)

 

6,662.0

 

7,654.4

 

8,101.9

 

Energy sales (GWh)

 

6,766.5

 

7,993.5

 

8,460.8

 

 


(1)   For details on generation facilities, see “ —D. Property Plants and Equipment.”

(2)   Total installed capacity is defined as the maximum MW capacity of generation units, under specific technical conditions and characteristics, in most cases confirmed by satisfaction guarantee tests performed by equipment suppliers certified by Bureau Veritas, an international independent certification company.  Figures may differ from installed capacity declared to regulating authorities and customers in each country, according to criteria defined by each authority and corresponding contractual frameworks. We have decided not to make a restatement of capacities based on this certification.

(3)   Energy generated defined as total generation minus own power plant consumption and technical losses.

(4)   Ventanilla’s generation in Peru consolidated since January 2006, Cartagena’s generation in Colombia consolidated since March 2006 and San Isidro II, Palmucho and Canela´s generation in Chile consolidated since April, November and December 2007 respectively.

 

We segment our sales to customers using two different categories.  First, we distinguish between regulated and unregulated customers.  Regulated customers are distribution companies who mainly serve residential clients.  Unregulated customers, on the other hand, may freely negotiate the price of electricity with generators or they may purchase electricity in the pool market at the spot price.  The second criterion we use to segment our customer sales is by contracted sales and non-contracted sales.  This method is useful because it provides a uniform way for us to compare our customers from country to country.  The countries in which we operate have varying classifications for what constitutes a regulated customer.  In contrast, contracted sales are defined uniformly throughout.

 

The following table contains information regarding Endesa Chile’s consolidated sales of electricity by type of customer for each of the periods indicated:

 

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ENDESA CHILE CONSOLIDATED PHYSICAL SALES BY TYPE OF CUSTOMER (GWh)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

 

 

Sales
(GWh)

 

% of Sales Volume

 

Sales
(GWh)

 

% of Sales Volume

 

Sales
(GWh)

 

% of Sales Volume

 

Regulated customers

 

20,146

 

35.4

 

22,881

 

41.4

 

23,779

 

42.7

 

Non-regulated customers

 

13,735

 

24.1

 

14,374

 

26.0

 

14,503

 

26.0

 

Electricity pool market sales

 

23,061

 

40.5

 

17,970

 

32.5

 

17,453

 

31.3

 

Total electricity sales

 

56,942

 

100.0

 

55,225

 

100.0

 

55,734

 

100.0

 

 

In general, in the countries in which we operate, the potential for contracting electricity is related to the volume of electricity demand.  Customers identified as small volume-regulated customers, such as residential customers, subject to government regulated electricity tariffs, must purchase electricity directly from a distribution company.  These distribution companies, which purchase large amounts of electricity for small residential customers, generally enter into contractual agreements with generators at a regulated tariff price.  Those identified as large volume industrial customers also enter into contractual agreements with energy suppliers.  However, such large volume industrial customers are not subject to the regulated tariff price.  Instead, these customers are allowed to negotiate the price of energy with generators based on the characteristics of the service required.  Finally, the market pool, where energy is normally sold at the spot price, is not carried out through contractual agreements.

 

The specific energy (measured in GWh) consumption limit for regulated and non-regulated customers is country specific.  Moreover, regulatory frameworks often require that regulated distribution companies have contracts to support their commitments to small customers and also determine which customers can purchase energy in electricity pool markets.

 

Under normal hydrological and fuel conditions our regulated and non-regulated customers carry out their commercial relationships by means of contracts.  The electricity pool market sales are not governed by contracts, but instead comply with pool market operations.

 

The following table contains information regarding our consolidated physical sales of electricity per customer segment:

 

ENDESA CHILE CONSOLIDATED PHYSICAL SALES PER CUSTOMER PRICE SEGMENT
(GWh)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

 

 

Sales
(GWh)

 

% of
Sales
Volume

 

Sales
(GWh)

 

% of
Sales
Volume

 

Sales
(GWh)

 

% of
Sales
Volume

 

Contracted sales (1)

 

33,881

 

59.5

 

37,255

 

67.5

 

38,282

 

68.7

 

Non-contracted sales

 

23,061

 

40.5

 

17,970

 

32.5

 

17,453

 

31.3

 

Total electricity sales

 

56,942

 

100.0

 

55,225

 

100.0

 

55,734

 

100.0

 

 


(1)   Includes the sales to distribution companies not backed by contracts in Chile and Peru.

 

In terms of expenses, the primarily variable costs involved in the electricity generation business, in addition to the direct variable cost of generating hydroelectric or thermal electricity such as fuel costs, are energy purchases and transportation costs. During periods of relatively low rainfall conditions, the amount of our thermal generation increases. This not only involves increasing the total cost of fuel, but also the cost of transporting that fuel to the thermal generation power plants. Under drought conditions, electricity that we have contractually agreed to provide may exceed the amount of electricity that we are able to generate, requiring us to purchase electricity in the pool market in order to satisfy our contractual commitments. The cost of these pool market purchases may, under certain circumstances, exceed the price at which we sell electricity under contracts, and result in a loss. We attempt to minimize the effect of poor hydrological conditions on our operations in any year primarily by limiting contractual

 

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sales requirements to an amount that does not exceed the estimated production in a “dry year.” In determining estimated production in a dry year, we take into account available statistical information concerning rainfall and water flows, and the capacity of key reservoirs. In addition to limiting contracted sales, we may adopt other strategies such as installing temporary thermal capacity, negotiating lower consumption levels with unregulated customers, negotiating with other water users and including pass-through costs clauses in contracts with clients.

 

The following table contains information regarding our electricity generation and purchases:

 

CONSOLIDATED PHYSICAL GENERATION AND PURCHASES (GWh)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

 

 

Sales
(GWh)

 

% of
Sales
Volume

 

Sales
(GWh)

 

% of
Sales
Volume

 

Sales
(GWh)

 

% of
Sales
Volume

 

Electricity generation

 

52,949

 

91.8

 

50,486

 

89.8

 

51,294

 

90.7

 

Electricity purchases

 

4,730

 

8.2

 

5,722

 

10.2

 

5,233

 

9.3

 

Total(1)

 

57,679

 

100.0

 

56,208

 

100.0

 

56,527

 

100.0

 

 


(1)   Total energy generation (GWh) plus purchases differs from GWh sales due to technical transmission losses in Chile and Peru, as the generation figure has already deducted power plant consumption and technical losses of generation units.

 

Our equity investees in Chile are primarily conducted through GasAtacama.  Gas Atacama Generation and Gasoducto Atacama Chile S.A. were merged into Gas Atacama Generación in November 2008 and then changed their name to Gas Atacama Chile S.A.  We have a 50% beneficial interest in Gas Atacama Chile S.A. through which we participate in the gas transportation and thermal generation business in northern Chile.  Since March 2008 we have a 51% beneficial interest in HidroAysén S.A. through which we participate in a hydroelectric project in the 11th Region.  Under current Chilean GAAP,  projects are not consolidated.  We also participate in the gas transportation business in Chile through our related company, Electrogas S.A. (“Electrogas”), in which we have a 42.5% beneficial interest.  Electrogas owns a pipeline to the Fifth Chilean Region and supplies natural gas to the power plants San Isidro and Nehuenco.  The other shareholders are Colbún S.A. and ENAP.

 

Since September 2005, our participation in the Brazilian electricity business is carried out through our equity investment in Endesa Brasil, in which we have a beneficial interest of 37.7%.  Endesa Brasil consolidates operations of two generation companies, Central Geradora Termeléctrica Endesa Fortaleza S.A.,(“Endesa Fortaleza”), and Cachoeira Dourada; CIEN, which owns two transmission lines between Argentina and Brazil; CTM and TESA, subsidiaries of CIEN which own the Argentine side of the lines; and two distribution companies, Ampla Energía e Servicos S.A.,(“Ampla”), which is the second largest electricity distribution company in the State of Rio de Janeiro and Companhia Energética do Ceará S.A. (“Coelce”), which is the sole electricity distributor in the State of Ceará.

 

We own and operate a total of 26 generation plants in Chile directly and through our subsidiaries Pehuenche, Pangue, San Isidro, Celta and Eco.  Of these plants, 16 are hydroelectric, with a total installed capacity of approximately 3,461 MW.  This represents 70.7% of our total installed capacity in Chile.  There are nine thermal plants which operate with gas, coal or oil with a total installed capacity of 1,414 MW, representing 28.9% of our total installed capacity in Chile, and there is one wind power unit with approximately 18 MW.  Twenty-four (16 hydroelectric, 7 thermoelectric and one wind power plant) of our plants are connected to the country’s major interconnected electricity systems, Sistema Interconectado Central, or the SIC, and the other two power plants are connected to the Sistema Interconectado del Norte Grande, or the SING.

 

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The following table sets forth the installed generation capacity for each of the Company’s Chilean subsidiaries:

 

INSTALLED CAPACITY PER SUBSIDIARY IN CHILE (MW) (1)

 

 

 

2006

 

2007

 

2008

 

Endesa

 

2,754

 

3,034

 

3,139

 

Pehuenche

 

695

 

699

 

699

 

Pangue

 

467

 

467

 

467

 

San Isidro

 

379

 

379

 

379

 

Celta

 

182

 

182

 

182

 

Endesa Eco

 

 

18

 

27

 

Total

 

4,477

 

4,779

 

4,893

 

 


(1)   The installed capacity was certified during 2006, 2007 and 2008 by Bureau Veritas.

 

Our total electricity generation in Chile (in both the SIC and the SING) reached 19,807 GWh in 2008, 5.5% higher than in 2007, and accounted for approximately 35.1% of total electricity production in Chile in 2008.

 

The following table sets forth the electricity generation for each of our Chilean subsidiaries:

 

ELECTRICITY GENERATION IN CHILE (GWh)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

Endesa

 

11,642

 

11,093

 

12,204

 

Pehuenche

 

4,345

 

3,437

 

3,589

 

Pangue

 

2,432

 

1,351

 

1,763

 

San Isidro

 

802

 

1,956

 

1,289

 

Celta

 

751

 

933

 

912

 

Endesa Eco

 

 

3

 

49

 

Total

 

19,973

 

18,773

 

19,807

 

 

Hydroelectric generation in 2008 was 5% higher than in 2007.  The potential energy in reservoirs at December 31, 2008 was 12% higher than at December 31, 2007, as shown in the following table.

 

 

 

Year ended December 31,

 

 

 

2007

 

2008

 

 

 

 

 

(GWh)

 

(GWh)

 

% Change

 

Reservoir

 

 

 

 

 

 

 

Laja

 

3,028

 

3,107

 

3

 

Maule

 

1,307

 

1,111

 

-15

 

Chapo

 

119

 

266

 

123

 

Colbún

 

283

 

406

 

43

 

Invernada

 

116

 

296

 

156

 

Rapel

 

53

 

60

 

12

 

Melado

 

6

 

9

 

54

 

Ralco

 

147

 

398

 

172

 

Total

 

5,059

 

5,652

 

12

 

 

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Hydroelectric generation accounted for 69.6% of our total electricity generation in 2008 compared with the 70.2% of 2007.  Generation by type in Chile is shown in the following table:

 

ENDESA CHILE HYDRO/THERMAL GENERATION IN CHILE (GWh)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

 

 

Generation
(GWh)

 

%

 

Generation
(GWh)

 

%

 

Generation
(GWh)

 

%

 

Hydroelectric generation

 

17,148

 

85.9

 

13,179

 

70.2

 

13,784

 

69.6

 

Thermal generation

 

2,825

 

14.1

 

5,591

 

29.8

 

5,993

 

30.3

 

Other generation (Wind)

 

 

 

 

 

3

 

0.0

 

30

 

0.1

 

Total generation

 

19,973

 

100.0

 

18,773

 

100.0

 

19,807

 

100.0

 

 

Our thermal electric generation facilities are either gas, coal or oil-fired.  In order to satisfy our natural gas and transportation requirements, we enter into long-term gas contracts with suppliers who establish maximum supply amounts and prices and long-term gas transportation agreements with the pipeline companies, currently Gas Andes and Electrogas (an Endesa Chile related company).  Since March 2008, all of Endesa Chile natural gas units can operate with natural gas and diesel.  We obtain our coal and fuel oil requirements through competitive auctions with major domestic and international suppliers.

 

Since 2006, Endesa Chile has increased the use of diesel from 23,000 tons in 2006 to 591,000 tons in 2007 and to 728,000 tons in 2008, and coal from 438,000 tons in 2006 to 851,000 tons in 2007 and to 774,000 tons in 2008.  During 2005, 2006 and 2007, San Isidro entered into a swap contract with Endesa Costanera, which allowed San Isidro to temporarily generate electricity with natural gas, using Endesa Costanera’s share, by paying Endesa Costanera the additional cost incurred through generation with fuel oil, plus a fee.

 

In May 2007, as part of a consortium with Enap, Metrogas and British Gas, in which Endesa Chile participation is 20%, we agreed to construction of the liquefied natural gas (“LNG”) regasification facility in Quintero Bay.  Partial commercial operations are expected to begin in June 2009 while full commercial operations should occur in April 2010.

 

In July 2008, we started construction of a pipeline that will supply the gas obtained at the regasification plant in Quintero to Quillota and further to San Isidro and other off takers.  The pipeline is 28 km long and 19 million m3/d capacity.  The construction was completed in February 2009 and commercial operations are expected for July 2009.

 

ELECTRICITY SALES PER SYSTEM IN CHILE (GWh)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

 

 

Sales
(GWh)

 

Sales
(GWh)

 

Sales
(GWh)

 

Electricity sales in the SIC

 

38,259

 

39,982

 

39,594

 

Electricity sales in the SING

 

12,027

 

12,674

 

13,219

 

Total Electricity sales

 

50,286

 

52,656

 

52,813

 

 

Our physical energy sales in Chile reached 20,923 GWh in 2006, 19,212 GWh in 2007 and 19,808 GWh in 2008 which represent a 41.6%, 36.5% and 37.5% market share, respectively.  The percentage of the energy purchases to satisfy our contractual obligations to third parties has declined from 6.2% in 2006 to 2.0% in 2008 as a result of our commercial strategy to reduce contracted sales.  This commercial strategy is primarily influenced by our decision to reduce hydrological exposure because of current regulations.  See “— B. Business Overview — Electricity Industry and Regulatory Framework.”  We attempt to minimize the effect of poor hydrological conditions on our operations, in any given year, primarily by limiting contractual commitments to an amount below the estimated production in a dry year.  Government regulations have had the direct effect of increasing contract failure costs, which is the cost that we should have to pay when we are unable to satisfy our contractual commitments, and the indirect effect of discouraging investment in generation assets.  Given the effects of the government regulations,

 

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energy supply has not increased as much as energy demand, which has the effect of increasing the spot price in the electricity pool market and making it a relatively more attractive commercial alternative.

 

The following table sets forth our electricity purchases and production in Chile:

 

ENDESA CHILE PHYSICAL GENERATION AND PURCHASES IN CHILE (GWh)

 

 

 

Year ended December 31,

 

 

 

2006

 

2007

 

2008

 

 

 

Sales
(GWh)

 

%
of Volume

 

Sales
(GWh)

 

%
of Volume

 

Sales
(GWh)